Marvell Technology Group Ltd. (NASDAQ:MRVL) was down as much as 15% last week on news that a federal jury has ordered the chip-maker to pay nearly $1.2 billion for infringing on patents held by Carnegie Mellon University. The initial damage award comes out to about $2 per share, but the stock is only down $1.30, effectively pricing in a $700 million hit or 60% of the total award.
With $2 billion in cash and the ability to generate strong cash flow - having generated between $70 and $250 million in each of the last eight quarters - we believe that Marvell can weather the storm. This is the third largest patent award in history, not too far ahead of the $1 billion award in the Apple-Samsung case earlier this month.
Marvell is hopeful the judge will reverse the verdict based on post-trial motions, and if not, the tech company plans to appeal. Even the $1 billion award in the Samsung-Apple fallout is expected to at least be reduced according to Pamela Jones. The founder of Groklaw, a website dedicated to legal suits concerning software, believes the damages will be reduced and that there is a "real possibility that Samsung will get a new trial, at least on the damages issue."
From a valuation standpoint, Marvell trades well below quick-growers Qualcomm and Broadcom at 12x earnings, and is the cheapest on a P/S basis (1.2x) as well. Marvell should benefit from its plans to boost gross and operating margins, which are currently 52% and 14%, respectively. The tech company's targets are a 57% gross margin and a 25% operating margin.
Assuming that David Einhorn still owns the 32 million shares that he had at the end of 3Q, Greenlight Capital lost upwards of $32 million last week on the sell-off. What's more is that Greenlight might have lost over $65 million since the beginning of 4Q given Marvell is down almost 25% over this time. Einhorn is Marvell's most committed hedge fund owner of those we track (check out David Einhorn's newest picks).
What about Marvell's competitors?